Temporary Tariff Pause Mitigates Trade Contraction But Risks Persist, Says WTO Report

The World Trade Organization (WTO) anticipates a 0.2% decline in global merchandise trade volume by 2025, as per their latest report. This forecast is nearly three percentage points lower than the "low tariff" baseline scenario. The report, released on 16 April, suggests that if conditions worsen, trade could shrink by as much as 1.5% in 2025.

Director-General Ngozi Okonjo-Iweala expressed concern over the uncertainty in trade policy, particularly the US-China tensions. She stated, "The recent de-escalation of tariff tensions has temporarily relieved some of the pressure on global trade. However, the enduring uncertainty threatens to act as a brake on global growth, with severe negative consequences for the world, the most vulnerable economies in particular."

The WTO's report highlights that services trade is also expected to slow down, with a projected growth of 4.0%, which is less than previously anticipated. Although services are not directly affected by tariffs, they are still impacted by overall trade conditions.

At the beginning of the year, WTO economists predicted continued growth for both merchandise and services trade through 2025 and 2026. However, new tariffs introduced since January have led to a significant downgrade in these forecasts.

The report notes that recent tariff measures will impact regions differently in 2025. The reactivation of suspended "reciprocal tariffs" by the United States poses a risk to merchandise trade forecasts. If these tariffs are reinstated, they could reduce global merchandise trade growth by 0.6 percentage points.

WTO Chief Economist Ralph Ossa commented on the effects of trade policy uncertainty: "Our simulations show that trade policy uncertainty has a significant dampening effect on trade flows, reducing exports and weakening economic activity." He emphasized that tariffs have wide-ranging impacts with often unintended consequences.

Forecast Revisions and Future Prospects

The latest forecast marks a shift from 2024 when world merchandise trade grew by 2.9%, outpacing GDP growth of 2.8%. This was the first time since 2017 that merchandise trade exceeded output growth outside of pandemic recovery years.

The Analytical Chapter of the WTO report explores scenarios where reciprocal tariffs and spreading policy uncertainty could lead to a combined decline of 1.5% in world merchandise trade by 2025.

In light of these challenges, Okonjo-Iweala urged WTO members to seize opportunities to invigorate the organization and adapt agreements to current global realities. She highlighted the need for streamlined decision-making and fostering a level-playing field amid ongoing uncertainties.

With inputs from WAM